Let's decide what we want

Retirement Commissioner Colin Blair says political parties need to clarify their superannuation objectives before they start making policy.

Friday, September 28th 2001, 3:50PM

Any sound
debate on pension reform should not be represented or seen as
an attack on pensioners. Open discussion and better information
are essential in ensuring that agreed objectives relating to retirement income policy are met in ways that are both fiscally and politically
sustainable.

Both major political parties and some of
the minor parties have made it clear that they will not change
New Zealand Superannuation in a way that would adversely impact
on those currently in or near retirement. That is an important step towards creating an environment where retirement
income issues can be discussed without political considerations
and self-interest dictating the outcome.

The present coalition Government has gone
further and indicated that its policy for the foreseeable future
is to retain the existing "65 at 65" approach. That
is, a pension for a couple equal to a minimum of 65% of average
after-tax normal time wage payable from age 65. The equivalent
percentage for a single person is around 40%. The Government
has said that the partial pre-funding scheme is intended to help
the ability of future governments to retain the "65 at 65"
policy without the need for sudden and significant future tax
increases.

It is clear however is that with the strength
of some of the political opposition to the partial funding arrangement,
the debate on long-term retirement income policy is far from over.

The quality of that debate is in our view
extremely important. It will be unfortunate if it becomes a struggle
between parties to win the votes of those for whom retirement
income is of immediate or short-term concern. The welfare of that group is obviously important. But
the most important objective must be that as a nation we produce
sufficient goods and services to meet the reasonable needs of
all generations. Our retirement income policies must be in tune
with that overriding objective of increased national productivity.

An election-based debate on pension policy
will be one on which most members of the public will find very
difficult to adjudicate. Not because they lack the intelligence,
but simply because it is one of those complex issues where there
is no single right or wrong answer. In a recent paper prepared
for the International Monetary Fund, Professor Nicholas Barr from
the London School of Economics, having emphasised what he terms
the "centrality of output to the macroeconomic viability
of pensions," identified eight questions to be considered
in the design of pension policy. He made the point that simple
yes/no answers to just the eight questions could yield up to 256
possible combinations, "the answers to which will depend
on economic variables and on a country's culture and history."
The eight questions by no mean exhausted the list. For example,
the role of tax incentives was not included.

Professor Barr argues that rational policy
design starts by agreeing objectives. He says that the objectives
of pension systems are threefold: poverty relief, consumption
smoothing, and insurance (for example, against longevity risk).
His eight questions relate to issues such as the size of and
level of redistribution in the first tier to cover poverty relief;
should there be a second tier to provide consumption smoothing
between pre- and post-retirement years and, if so, should that
tier be integrated with the first, should it be funded or PAYG,
should it be defined benefit or defined contribution, and should
it be managed publicly or privately; should people be able to
opt out of a State second tier into a private scheme, and finally
to what extent should the State assist with indexing pensions.

Professor Barr advocates that only when
the policy issues are defined and agreed should the debate turn
to the detail of the instruments for achieving the policy objectives.

We would be very surprised if New Zealanders
are able to say what the policy objectives of the various political
parties are relating to our state pension and retirement income
polices. It is certainly not clear whether party differences
over issues such as partial pre-funding and design features of
New Zealand Superannuation arise because of different policy objectives
or simply represent different approaches to achieving similar
objectives.

We would urge any political parties which
wish to seek public support for their policies to start by clearly
articulating their policy objectives. We may be surprised at
how much commonality there is between parties. On the other hand,
if significant philosophical differences arise then the public
will be better placed to understand the reasoning behind differences
in approach.

We mention the above because one of our
main functions is to assist New Zealanders, through education
and information, to make decisions which assist them in meeting
their retirement objectives. People cannot properly determine the action they should take without having
a clear understanding of the role of the State in this area.

After a quarter century of ad hoc change
most New Zealanders are looking to our political leaders to clearly
enunciate a pension policy which is based on consideration of
questions such as those raised by Professor Barr and which takes account of our economic position as well
as our culture and history.

Whatever happens at political level the
Office will continue to promote the benefits of private saving.
We will do what we can to ensure that New Zealanders have access
to good information and education relating to the effective management
of their personal financial resources. That is the modest but
important contribution we can make to the economic growth of New
Zealand and to the financial security of New Zealanders.